Income Taxes and the Labor Supply of Married Women in Quebec

Abstract

In recent years, a substantial literature has developed, for the most part in the U.S., concerning labor supply behavior. Of particular interest is the labor force behavior of married women since this raises a set of interesting theoretical and empirical issues.' Despite the extensive research in both the U.S. and the U.K. there has been relatively little empirical investigation in Canada. This is surprising given the increasing importance of women in the Canadian labor force and the concern expressed by policy makers.2 This study presents some empirical results on the labor supply behavior of married women in Quebec, using data on 2439 husband-wife families for 1979. In estimating labor supply responses of married women, we take into account the effect of income taxes, and address the question of tax perception.3 The impact of taxes on labor supply is particularly important in the Quebec context since Quebec marginal tax rates are the highest in Canada and, it appears, in North America. The study also compares the results of alternative methods of estimation. Married women's labor supply functions are estimated using standard OLS techniques, a procedure suggested by Heckman [12; 13] which corrects for selectivity bias, a two-stage GLS technique which also corrects for selectivity bias, and a GLS method applied to a system of equations. The conceptual framework of labor supply determination is briefly reviewed in section II. Section III describes the data, the empirical specification, and the estimation strategy